Brazilian Economists Call for Boosting Investments

A rare consensus exists among Brazilian economists — the country not only needs to increase investments, it needs to do it at a pace faster than overall economic growth and for at least several years in a row.

“From 2004 to 2011, economic growth was generated by fostering consumption,” says Raul Velloso, managing partner of Brasília‘s ARD consulting group. “But that model for development has reached a point of exhaustion.”

Rising salaries, massive welfare and benefit payments, and steadily increasing government spending have led to a huge increase in demand for goods and services. Yet investments haven’t kept up, and industry can’t keep pace, bringing hefty imports, a yawning current account deficit and inflation.

Deterioration is everywhere.

Brazil’s current account deficit ballooned to a 12-month level of $80.5 billion as of September from $54.0 billion at the end of 2012. The public sector deficit, for the 12 months ended in September, hit 155 billion Brazilian reais ($66.8 billion), more than a third higher than the 109 billion reais posted at the end of 2012. Inflation, running at the same 5.8% rate as in 2012, is still well above the government’s 4.5% target.

Growth has taken a hit too. Once the emerging-market darling of global investors, Brazil is now in its third year running of sub-par growth. A hoped-for 2013 rebound is likely to fizzle amid a consensus growth forecast of 2.5%. A bit less is expected for 2014.

Economists, in and out of government, agree the problem is on the supply side.

“Brazil needs more investment,” declared Luciano Coutinho, president of the government-run National Bank for Economic and Social Development, or BNDES, at an October investment seminar in São Paulo. “And Brazil is already getting it. A rise in capital goods orders shows this. So does an increase in loan applications to the BNDES.”

BNDES invested around 105 billion reais in the first eight months of 2013, up 48% over the same period of 2012.

Mr. Coutinho’s financing writ extends over the whole of Brazil and virtually every segment of its potent but stiff economy. He said he expects a modest rise in Brazil’s investment rate this year to 18.9% of GDP from 18.1% in 2012. He sees a slow but steady advance to 22.2% by 2018.

For another thing, the critics argue even that modest level isn’t attainable under current policies.

The strain from social spending has made it frustratingly difficult for Brazil’s government to boost its contribution on the investment side. Social spending has increased significantly, but public investment has advanced at a snail’s pace.

Meanwhile, the faster pace of BNDES lending has merely compensated for a concomitant deceleration by private lenders.

“In the past, Brazil depended on foreign investment and government, but that left us vulnerable to foreign exchange volatility, international crises and the inherent limitations of federal treasury resources,” says José Francisco de Lima Gonçalves, chief economist at São Paulo’s Banco Fator. “The next phase of investment in Brazil will need to be based on capital markets and internal savings.”

But the latter come with their own limitations.

Punishingly high interest rates have made companies reluctant to issue bonds. Brazil’s base rate is already a towering 9.5% and likely to go higher as the central bank fights down inflation.

Domestic and global economic uncertainties have led to diminished share offers. Total domestic offers of shares and bonds in the first half of 2013 were 62.2 billion reais, down from 63.2 billion reais in the first half of 2012. Overseas issues were even weaker at $25 billion, down from $30.25 billion in the first half of last year, according to the Brazilian Capital Markets Association.

As for domestic savings, the rate has advanced since 2008 but not by much, from 6.9% of GDP to 7.9% in 2012.

Nor can Brazil rely on foreign investment to fill the gap. Net direct foreign investment has actually declined, on a 12-month basis, to $61.5 billion, or 2.7% of GDP, as of September from $65.3 billion, or 2.9% of GDP, at the end of 2012.

“Governments are supposed to plan for the long term, but we don’t do that in Brazil,” says Roberto Luis Troster, a partner at São Paulo’s Delta consulting group. “If the government plans for the year 2020, investors will invest because they’ll have an idea of what 2020 is going to look like. If government thinks only of the short term, the country doesn’t get the investments it needs.”

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